Surrender of insurance policies is set to become less loss-making as the regulator has proposed lower charges and better payout.

Long-term financial decisions are difficult to make and sometimes we even wish we could roll them back.

A life insurance policy is a long-term commitment made with an important responsibility in mind. However, when circumstances change, we need a way out, but surrender of your policy should be your last option.

We may need to move away from an investment commitment for various reasons. The premium is unaffordable because of straitened finances.

Or, the change could simply be in our own minds and we realise this may not be the best investment to continue with.

Policy lapse

At this point the options are to abandon the policy and let it ‘lapse’, surrender it or make it “paid-up”. In each case, we can stop paying the premium, but the benefits we sacrifice or retain are very different.

Losing coverage

When the policy lapses, we lose out on the coverage and the premium already paid.

When we surrender, the insurer offers you a lumpsum payment if you have held the policy for a specified minimum period, and coverage ceases. The third is the best of the three where, if the policy is eligible to become ‘paid-up’, a reduced life cover continues till the maturity date. This won’t be strictly proportional, but is better than losing it all.

There are options better than these as well. If you can take a loan against your policy, you can turn that money around and pay instalment premiums, even of several policies.

Ask your insurer for a premium holiday. However, only some types of policies allow it. But have a game plan to make it up as soon as you can. Should the policy lapse, you can also revive some types of policies.

Check if you can fund the premium through other sources. Loan against fixed deposit is an often-forgotten source of funds.

The other caution is, do not foreclose a deposit and lose out on interest. If under pressure, some FDs offer partial pre-closure and you can check that out.

As said before, let surrender be your last resort in insurance, unlike in spirituality which pervades the air in this month of Margazhi.

(The writer is a business journalist specialising in insurance & corporate history)